SEC Announces 2019 Examination Priorities

On December 20, 2018, the Securities and Exchange Commission (SEC), Office of Compliance Inspections and Examinations (OCIE) announced its 2019 examination priorities. These examination priorities are published annually in order to promote the transparency of the OCIE examination program and to provide insight into the areas of the financial system where there may be potential heightened risk to investors or to the integrity of U.S. capital markets.1 In 2019 OCIE’s emphasis will seek to include digital assets, cybersecurity and matters of importance to retail investors, such as fees, expenses and conflicts of interest.2 “OCIE continues to thoughtfully approach its examination program, leveraging technology and the SEC staff’s industry expertise,”3 indicated SEC Chairman Jay Clayton. “As these examination priorities show, OCIE will maintain its focus on critical market infrastructure and Main Street investors in 2019.”4

The report emphasizes that OCIE continually evaluates changes in market conditions, industry practices and investor preferences to help appraise risks to both investors and the markets, and although these developments may be continual, the Office’s analytic efforts and examinations remain anchored to its four pillars: promoting compliance, preventing fraud, identifying and monitoring risk, and informing policy.

What this means

In 2019, OCIE’s examination priorities fall into the following six general themes, while these are likely to be the SEC’s primary areas of focus, in a dynamic market, other compliance issues may receive attention throughout the year.6

Compliance and Risks in Critical Market Infrastructure7

In this area OCIE will try to focus on “Systemically Important” Clearing Agencies, Entities Subject to Regulations Systems Compliance and Integrity (SCI), including the effectiveness of the implementation of their compliance policies and procedures, Transfer Agents and their assets safeguarding, transfers and recordkeeping policies, and National Securities Exchanges and their internal audit and surveillance programs.

Retail Investors, Including Seniors and Those Saving for Retirement8

In this area OCIE emphasizes topics, most of which continue and/or expand upon existing examination priorities, including: Fees and Expenses, Disclosure of Costs of Investing, Conflicts of Interest, Senior Investors and Retirement Accounts and Products, Portfolio Management and Trading, Investment Advisors, Mutual Funds and Exchange Traded Funds, Municipal Advisors, and Broker Dealers Entrusted with Client Assets.

OCIE intends to continue to examine FINRA’s operations and regulatory programs and the quality of its oversight of broker-dealers, and the effectiveness of specific MSRB operational and internal policies, procedures and controls.

Digital Assets

Among the new OCIE’s priorities is a focus on digital assets, including cryptocurrencies, coins and tokens, the participants in the digital assets market including broker-dealers, trading platforms and investment advisors, and the specific risks presented by the digital assets market to retail investors.10 OCIE intends to “identify market participants offering, selling, trading and managing these products … assess the extent of their activities.”11 OCIE examinations will then focus on “portfolio management of digital assets, trading, safety of client funds and assets, pricing of client portfolios, compliance, and internal controls.”12

Cybersecurity13

Each of OCIE’s examination programs will seek to continue to prioritize cybersecurity with an emphasis on proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.

Anti-Money Laundering (AML) Programs

OCIE intends to continue to prioritize broker-dealer compliance with applicable AML requirements, including proper filing of Suspicious Activity Reports and robust and independent testing of their AML programs, in order to address their regulatory obligations.14

The SEC notes that the published priorities for 2019 are not exhaustive and will not be the only issues OCIE addresses in its examinations. While these priorities drive the examinations process, the scope of any examination is assessed through a risk-based approach that includes analysis of an institution’s operations, products offered, in addition to other factors.15

Conclusion

These priorities reflect OCIE’s assessment of certain risks, issues and policy matters arising from market and regulatory developments over the past year, and take into account information gathered from various sources including prior examinations, tips, complaints and referrals, and in coordination with other relevant regulators.16 It should be noted that the 2019 priorities not only reflect Chairman Jay Clayton’s prior emphasis on retail investors, changes in technology and cybersecurity, but also continue to reflect a degree of continuity with the priorities of the SEC under prior Chair Mary Jo White.17 In its conclusion OCIE emphasizes that it “welcomes comments and suggestions regarding how it can better fulfill its mission to promote compliance, prevent fraud, identify and monitor risk, and inform SEC policy.”18

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